Data delay adds wrinkle to U.S. inflation bond sales

Reuters

* U.S. to sell $7 bln in 30-year TIPS next Thursday

* BLS will now release Sept. CPI report on Oct. 30

* Cleveland Fed warns of skewed data due to govt shutdown

By Richard Leong

NEW YORK, Oct 18 (Reuters) - While the federal governmentramped its operations back up on Thursday, 16 days of a partialshutdown have left some lingering headaches in certain cornersof the bond market that rely on timely inflation data to valuesecurities.

The small army of data collectors from the Bureau of LaborStatistics and the Census Bureau who gather pricing informationeach month on everything from animal crackers to automobileswere among the federal workers furloughed during the shutdown.

That has left a sizeable gap in the figures used to compilethe Consumer Price Index, the broadest measure of U.S.inflation. Release of September's CPI reading, originallyscheduled for Oct. 16, was postponed and has been rescheduled toOct. 30.

Economists at the Federal Reserve Bank of Cleveland warnedthis week that the data-gathering hiatus could have an impact onthe accuracy of the CPI until next May. The index is computedfrom 83,300 separate price quotes.

For fixed income securities traders and fund managers, theproblem is that monthly CPI increases or decreases are essentialto valuing a class of bonds designed to offer protection againstinflation, which is a bondholder's greatest enemy. Principal andinterest payments for these bonds, Treasury Inflation-ProtectedSecurities, or TIPS, adjust to changes in CPI.

Imprecise CPI readings, analysts say, could further nick theappeal of TIPS, which are already under pressure on bets thatwage and price growth will likely stay subdued due to theeconomic drag from the shutdown.

The appetite for the securities will face its first testnext week when the Treasury will sell $7 billion more of anexisting $16 billion series of 30-year TIPS, sixdays before the postponed release of the September CPI figures.

That means the TIPS Index Ratio used to help calculate thebond's principal will be two months old at the time of nextweek's auction. Typically, the CPI report is released prior to aTIPS auction.

While the delay is expected to have a relatively limitedimpact, "we are seeing more of a concession than usual," saidMichael Pond, co-head of interest rate strategy at BarclaysCapital in New York, meaning that investors are positioning fora somewhat lower price for the new amount being sold than forthe amount currently outstanding.

On Friday, the yield on the 30-year TIPS issue that will be reopened next Thursday was about 1.375 percent.Traders expect the added amount to this TIPS issue to fetch a slightly higher yield at 1.379percent. A higher yield means a lower price since bond pricesand yields move in opposite directions.

TIPS breakevens, or the differences between the yields onTIPS and regular Treasuries, shrank this week as investorssnapped up regular Treasuries more than TIPS after thegovernment reached an 11th hour agreement to avert a default byextending the government's $16.7 trillion borrowing authority.

The 30-year TIPS breakeven was 2.230 percentage points,compared with 2.345 points a week earlier.

The timing of the CPI delay comes when there are growingexpectations the economic drag due to the first federal shutdownin 17 years will force the Federal Reserve to stick with its $85billion monthly bond-purchase stimulus into 2014.

The Fed's program has helped push asset prices up but hasnot fanned wider price pressures in the economy. The absence ofinflationary pressures could damp TIPS demand as well.

In August, the reference month for Thursday's auction, theCPI edged up just 0.1 percent, bringing its year-over-yearincrease to a modest 1.5 percent, which is below the 2 percentlevel for inflation targeted by the Fed.

Economists polled by Reuters expected the September CPIlikely rose by 0.2 percent from a month earlier and by 1.2percent from the previous year.

Although a last-minute deal in Congress averted a defaultand reopened the government on Thursday, another Washingtonepisode of gridlock could unfold in early 2014, possibly causinganother disruption to the economy, not to mention thegovernment's collection of economic data.

"The real story here is the real economy, not the datacollection. We expect (TIPS) breakevens to rise but if therecontinues to be a headwind due to the situation in Washington,that will keep inflation expectations low," Barclays' Pond said.

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